Federal Reserve Chair Ben Bernanke gave a good talk today -- worth reading if you're up for slogging through such things -- wherein he stressed the benefits and costs of all the stuff the Fed can do to help boost the economy when their main tool -- the federal funds rate -- is stuck at zero.
If you were looking for Gentle Ben to announce that the Fed was going to apply more of its unconventional methods at a date certain, you were again disappointed. But I didn't expect that. The committee is meeting is less than two weeks, and they'll be another jobs report between now and then.
But I thought the subtext of the speech was:
... our asset purchases and forward guidance (buying a lot of debt and saying they'll keep rates low for a while) have worked pretty well, maybe increasing GDP by 3% and adding 2 million jobs. Yes, these unusual moves by the Fed can turn out badly, but we're aware of that potential and think we're good. And there's just too many people stuck in unemployment. Also, prices seem very stable to us. So, unless there's a clear acceleration in growth right around the corner, we're going to rock some more unconventional easing real soon.
The benefits of these actions are lower interest rates and higher asset prices than would otherwise prevail, along with more policy certainty about future Fed moves, all of which are, according to Fed research, behind those growth and jobs results just noted.
The costs, as Ben enumerated them, are:
- The Fed can dominate the market for the assets it acquires, thus distorting their price;
- Markets worry that the Fed has acquired so many assets that it can't safely unwind (sell them back to private investors) without disrupting markets and prices;
- By driving interest rates so low, the Fed triggers a bubble as investors imprudently "reach for yield;"
- If interest rates should spike, the Fed -- which like any bank holds liabilities to match its assets -- could incur losses.
Re: that last point, so far, the Fed's asset holdings have earned them $200 billion which they've remitted to general revenue, as is the rule. That's well above their average remittances, by the way.
I think the benefits outweigh the costs. The cost I take most seriously is #3, which militates a watchful eye on nascent bubbles, something the Fed has actually been very bad at in recent decades. Ben mentions the role of new Financial Stability Oversight Council, created by Dodd/Frank financial reform. No one knows yet how effective this new council will be in financial oversight... Keynes knows we need them to be very good. But for the record, there'd be no FSOC under a Romney/Ryan administration, as they've pledged to repeal financial reform. Just sayin'...
Finally, haven't I argued that these Fed measures won't do much absent more demand side action on the fiscal side? I have, and I still think that's right. Ben himself warned of "sharp near-term fiscal contraction that could endanger the recovery."
But there are many reasons for an independent Fed and one of the most important is to provide what the economy needs when politics are all bollixed up. Which they are.
So get 'em Ben! Make your next move, dude!
This post originally appeared at Jared Bernstein's On The Economy blog.